I've been doing options for a while but I never hold them to the end. How does a multi leg option work when you get to expiration? do people tend to exit early or can you sit on it till the end? or is this a dumb question because each type of strategy might be done differently?
TLDR
1. The same as any option at expiration
2. Both--close early and let expire
3. Definitely not dumb
Slightly more useful, there really is no difference between a multi leg position and a single leg position when it comes to expiration. In the multi leg position, whatever options are OTM will expire worthless, and whatever options are ITM will be auto executed. (TBH I've never held an ITM long call/pul to expiration so I'm not 100% sure they actually auto execute, but the short put/call will definitely auto execute 'like normal'). The slight complication comes with the fact that some of the legs in a multi-leg position might be ITM and some might be OTM, and that really just informs your next move (close, roll, whatever).
Soapbox here: with all positions its imperative to have an exit strategy on both the upside and the downside. With capped profit (credit) positions its usually good to exit at some % max profit (70%, 90%, whatever works for you). Some platforms will let you set a stop loss against the multi leg position to exit all at the same time, but others (like Fidelity) won't let you do that with a multi leg position. There are some clever workarounds that can potentially help you eek out a few more bucks in that kind of situation, but that's another conversation.
Anyway, exiting at 90% max profit (or whatever) explicitly means you're going to exit early and not take the position to expiration. BUT, if you're not planning on doing anything with the capital anyway you can always just let the thing expire worthless and earn the extra few bucks in profit and not have to (potentially) pay the fees to close. (Some platforms let you close for free at very low contract values). Regardless who you are or how big your bankroll is, $20 is $20, you know? Flip side, if you're planning to re-allocated that capital in a new position (including rolling) then its best to monitor roll options based on logic we've discussed recently upthread.
All that of course assumes a winning/OTM position. If anything is ITM there's additional complexity, though not really dissimilar to having a sold put or sold call ITM.
I'm looking at what happens to calendar spreads and straddle if you go to expiration.
As noted above, it really just comes down to what legs are ITM vs OTM. There's nothing additionally complex about multi-leg positions. FWIW I find it useful to consider each side of the multi-leg as its own position (so, like, the put spread of an Iron Condor vs the call spread or the -P of the straddle vs the -C) and consider the OTM/ITM inflection point to be the anchor leg of a spread (so again for the IC, the -P or the -C).
A calendar is a little more complex as there are explicitly two different expiration dates, but to answer your question its still the same deal where a contract is either worthless or ITM on the day it expires.
Typically calendars are built so the short leg expires before the long leg with the logic that the short leg will expire worthless and then leave you with a [partially] paid for long leg (That also includes rolling the short leg to collect more and more extrinsic value), so the end goal is really that long contract and its theoretically unbounded profit. That's different than typical option selling for credit, where the profit potential is capped.
For instance, you calendar might be a long call at 12 weeks and a short call at 2 weeks. At 2 weeks maybe you roll the -C another two weeks, and then maybe you do it again. At the end of that you're left with a +C with 6 weeks until expiration (Which gives you ~2 weeks to decide what to do with it, if you subscribe to the "never hold long options closer than a month"), and you've offset the price of that +C with three 2-week -Cs. If you were agressive you may have fully paid off the +C. If you were conservative, you may have just wanted to offset time decay and volatility loss of the +C. But whether agressive or conservative, the fundamental objective of this kind of calendar is a directional position, just one that trades unlimited upside for downside protection.
One could theoretically build a calendar where the long leg expires first. I've never done this but one could imagine it would sort of follow regular credit spread logic. I think margin could get a little wonky too--the broker might consider it a naked short when assessing margin requirements, because once the [closer expiration] long expires you're left with a naked short. Just after some basic playing around with strikes and expirys and P/L's, its not clear to me there would be a material upside to this strategy. It still ends up a directional play, and there are better ways to make directional plays.
For funsies, here's a random spread I built, a -C Feb 19 $800 and a +C Feb 5 $775. It costs ~$0 to enter, but potentially requires as much margin as you need for a naked $800 call (Which could be a lot...). I guess the best thing about it is that the downside is pretty manageable early on in the position--if TSLA were to tank to $700 in a week, you'd be down less than $1000.
